XlII-O0012

From:Sent:To:Cc:

Subject:Attach:

Douglas Friedman <Douglas.Friedman@tradeweb.com>

Monday, December 6, 2010 12:09 PM

SEFRules <SEFRules@CFTC.gov>

Lee Olesky <Lee.Olesky@tradeweb.com>; Simon Hylson-Smith <Simon.Hylson-S mith@tradeweb, corn>Tradeweb Comment Letter re SEFs for the Pre-Comment Period

Tradeweb Comment Letter on SEFs.pdf

Attached please find Tradeweb’s comment letter regarding SEFs in connection with the pre-comment period.

Please do not hesitate to contact me if you have any questions.

Best regards,

Doug

Douglas FriedmanGeneral Counsel1177 Avenue of the Americas ¯ New York, NY 10036P 646.430.6104, F 646.430.6264 ¯ C 973.868.4964dou.q.friedman@tradeweb.com

TradewebVisit Det’]v AJe~[ for pertinent news and information on OTC derivatives regulation

" TradewebDecember 6, 2010

Mr. David A. StawickSecretary to the CommissionCommodity Futures Trading Commission1155 21st Street, NWWashington, DC 20581

1177 Avenue of the AmericasNew York, NY 10036

direct: (646) 430-6000fax: (646) 430-6250

e-mail: help@tradeweb.comwww.tradeweb.com

Ms. Elizabeth M. Murphy, SecretarySecurities and Exchange Commission100 F Street, NEWashington, DC 20549-0609

Re: Swap Execution Facilities

Dear Mr. Stawick and Ms. Murphy:

Tradeweb Markets LLC ("Tradeweb") appreciates the opportunity to provide commentsto the Commodity Futures Trading Commission ("CFTC") and Securities and ExchangeCommission ("SEC") (collectively, the "Commissions") with respect to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), and inparticular, the definition of Swap Execution Facility ("SEF") and related Core Principles forSEFs in advance of the Commissions’ proposed rulemaking on SEFs.l

Since 1998, Tradeweb has been at the forefront of creating electronic trading solutionswhich support price transparency and reduce systemic risk, the hallmarks of Title VII of theDodd-Frank Act, and Tradeweb is broadly supportive of the Dodd-Frank Act and its stated goals.The Dodd-Frank Act recognizes the existence and importance of electronic execution facilities inachieving these objectives, and by distinguishing between SEFs and exchanges ("DCMs"), theDodd-Frank Act further recognizes that both SEFs and DCMs can achieve these goals. The SEFdefinitions and associated core principles are largely adopted from exchange principles but thatshould not mean that the sole means through which swaps can and should be traded areexchanges. Indeed, if interpreted too narrowly, the rules could force existing electronic tradingvenues like Tradeweb to unnecessarily change their currently regulated platform’s derivativestrading model -- from request for quote ("RFQ") to a central limit order book - even thoughTradeweb’s current RFQ model provides the electronic pre-trade transparency (throughstreaming prices), efficiency, liquidity, and risk reduction that the Dodd-Frank Act seeks toachieve.2

Tradeweb’s comments are intended to address the definition and purpose of SEFs in connection with thepre-rule comment period. Tradeweb intends to submit comments to the proposed rules on SEFs once released, andTradeweb has already submitted comments letters to the Commissions’ proposed rules on mitigation of conflicts ofinterest, and intends to comment separately on the recently proposed rules on real-time trade reporting.

Electronic RFQ is a fully-disclosed trading protocol, in which the liquidity taker (the client) can request(and receive) multiple, competitive prices (streaming, if requested) simultaneously; the liquidity makers (dealers) areaware of their identities before a trade is executed, and have discretion as to whether to respond and/or trade withsuch counterparties. The trades are completed for the full size (i.e., no partial fills).

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December 6, 2010Page 2.

We believe regulation should foster the benefits these platforms provide, rather thaninhibit them, and the roles should create a competitive marketplace that encourages the provisionof adequate liquidity to market participants. To that end, the rules should be flexible to includevarious trading models and protocols (e.g., RFQ, central limit order book, hybrid) so that themarketplace has access to trade in a manner consistent with the provision of liquidity andmanagement of risk. The new roles for derivatives need to recognize the market characteristicsand the important role of various trading models and protocols, not for the sake of privateenterprise, but so that genuine end-users retain the flexibility and access to liquidity toeffectively manage their risk.

In short, we are supportive of the goals to reform the derivatives markets and indeed weprovide the very solutions the regulation seeks to achieve, but are concerned that theCommissions may overreach in their interpretation of the letter and spirit of the law, and in doingso create unintended consequences for end-users and the marketplace as a whole.

I. Background on Tradeweb

Tradeweb is a leading global provider of electronic trading platforms and related dataservices for the OTC fixed income and derivatives marketplaces. Tradeweb operates threeseparate electronic trading platforms: (i) a global electronic multi-dealer to institutional customerplatform through which institutional investors access market information, request bids andoffers, and effect transactions with, dealers that are active market makers in fixed incomesecurities and derivatives, (ii) an inter-dealer platform, called Dealerweb, for U.S. Governmentbonds and mortgage securities, and (iii) a platform for retail-sized fixed income securities.3

Founded as a multi-dealer online marketplace for U.S. Treasury securities in 1998,Tradeweb has been a pioneer in providing market data, electronic trading and trade processing inOTC marketplaces for over 10 years, and has offered electronic trading in OTC derivatives on itsinstitutional dealer-to-customer platform since 2005. Active in 20 global fixed income, moneymarket and derivatives markets, with an average daily trading volume of $250 billion,Tradeweb’s leading institutional dealer-to-customer platform enables more than 2,000institutional buy-side clients to access liquidity from more than 40 sell-side liquidity providersby putting the dealers in real-time competition for client business in a fully-disclosed auctionprocess. These buy-side clients comprise the majority of the world’s leading asset managers,pension funds, and insurance companies, as well as most of the major central banks.

Since the launch of interest rate swap ("IRS") trading in 2005, the notional amount ofinterest rate derivatives traded on Tradeweb has exceeded $5 trillion from more than 65,000

3 Tradeweb operates the dealer-to-customer and odd-lot platforms through its registered broker-dealer,

Tradeweb LLC, which is also registered as an alternative trading system ("ATS") under Regulation ATSpromulgated by the SEC under the Securities Exchange Act of 1934. Tradeweb operates its inter-dealer platformthrough its subsidiary, Hilliard Farber & Co., Inc., which is also a registered broker-dealer and operates Dealerwebas an ATS. In Europe, Tradeweb offers its institutional dealer-to-customer platform through Tradeweb EuropeLimited, which is authorized and regulated by the UK Financial Services Authority as an investment finn withpermission to operate as a Multilateral Trading Facility. In addition, Tradeweb Europe Limited has registered branchoffices in Hong Kong, Singapore and Japan and holds an exemption from registration in Australia.

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trades. Tradeweb has spent the last 5 years building on its derivatives functionality to enhancereal-time execution, provide greater price transparency and reduce operational risk. Today, theTradeweb system provides its institutional clients with the ability to (i) view live, real-time IRS(in 6 currencies, including U.S., Euro, Sterling, Yen), and Credit Default Swap Indices (CDXand iTraxx) prices from swap dealers throughout the day; (ii)participate in live, competitiveauctions with multiple dealers at the same time, and execute an array of trade types (e.g.,outrights, spread trades, or rates switches); and (iii)automate their entire workflow withintegration to Tradeweb so that trades can be processed in real-time from Tradeweb tocustomers’ middle and back offices, to third-party affirmation services like Markitwire andDTCC Deriv/SERV, and to all the major derivatives clearing organizations. Indeed, last month,Tradeweb served as the execution facility for the first fully electronic dealer-to-customer interestrate swap trade to be cleared in the U.S. Tradeweb’s existing technology maintains a permanentaudit trail of the millisecond-by-millisecond details of each trade negotiation and all completedtransactions, and allows parties (and will allow SDRs) to receive trade details and access post-trade affirmation and clearing venues.

With such tools and functionality in place, Tradeweb is providing the OTC marketplacewith a front-end swap execution facility. Moreover, given that it has the benefit of offeringelectronic trading solutions to the buy-side and sell-side, Tradeweb believes that it can providethe Commissions with a unique and valuable perspective on the proposed rules.

II. Background on the OTC Credit and Rates Derivatives Marketplace

How do the OTC credit and rates derivatives marketplaces operate today?

Today, there are generally two institutional marketplaces for over-the-counter (OTC)credit and rates derivatives: the dealer-to-customer market (institutional) and the interdealermarket (wholesale). In the institutional market, the largest dealers buy and sell derivatives withtheir institutional customers (e.g., asset managers, corporations, pension funds, etc.) on a fully-disclosed and principal basis. In the institutional market, the provision of liquidity is essentialfor corporations, municipalities and government organizations (i.e., end users), which havenumerous different asset and liability profiles to manage. The need for customized riskmanagement solutions has led to a market that relies on flexibility - so end-users can adequatelyhedge interest rate exposure - and liquidity providers, who have the ability to absorb the variedrisk profiles of end-users by trading standard and customized derivatives. These dealers thenoften look to the wholesale market - the market wherein dealers trade derivatives with oneanother - to obtain liquidity or offset risk as a result of transactions effected in the institutionalmarket or simply to hedge the risk in their portfolios.

In the wholesale market, brokers ("IDBs") act as intermediaries working to facilitatetransactions between dealers. There is no centralized exchange (i.e., derivatives are traded over-the-counter), and as a result, dealers look to IDBs to obtain information and liquidity while at thesame time preserving anonymity in their trades. Currently, in the United States, these trades areprimarily accomplished bilaterally through voice brokering. By providing a service throughwhich the largest and most active dealers can trade anonymously, IDBs prevent other dealersfrom discerning a particular dealer’s trading strategies, which in turn (i)reduces the costs

December 6, 2010Page 4.

associated with the market knowing a particular dealer is looking to buy or sell a certain quantityof derivatives, (ii) allows the dealer to buy or sell derivatives in varying sizes, providing stabilityto the marketplace, and (iii) enhances liquidity in the marketplace.

Both the wholesale and institutional derivatives markets trade primarily through bilateralvoice trading, with less than 5% of the institutional business trading electronically. In thesemarkets, trades are often booked manually into back office systems and trades are con_firmedmanually (by fax or other writing), and some (but not all) derivatives trades are cleared.

How will (and should) the credit and rates derivatives markets operate under the Dodd-Frank Act?

With the implementation of the Dodd-Frank Act, we expect most of the derivativesmarket will be subject to mandatory clearing, traded on a regulated swap market, and the entiremarket will be subject to public reporting. Accordingly, with increased electronic trading, thecredit and rates derivatives markets will be much more transparent and efficient, and systemicrisk will be reduced as the regulated swaps markets establish direct links to designated clearingorganizations ("DCOs") and swap data repositories ("SDRs").

In light of the foregoing and with the forthcoming business conduct standards, we believethe trading mandate was not intended to be and does not need to be limited to a specific tradingmodel (e.g., only anonymous central limit order book trading) to achieve the goals of the Dodd-Frank Act. Indeed, to do so, would undermine these goals. Requiring (directly or indirectly)central limit order book-like trading would materially impact current market structure, because itwill likely reduce the number of instruments traded, and effectively reduce the ability for end-users to adequately manage their risk. In short, the move to a regulated electronic swap market(without regard to trading model but with the appropriate transparency and regulatory oversight)and clearing is what will accomplish the policy goals without hurting liquidity and disrupting themarket. It is critical that the Commissions do not propose rules that artificially and unnecessarilyhurt the market and undermine the goals of the Dodd-Frank Act.

III. Key Considerations for SEF Rulemaking

What is a SEF?4

While the definition of a SEF has been the subject of much debate and speculation, onething is clear -- the Commissions should not read/interpret the SEF def’mition merely as a centrallimit order book because that would be redundant of the concept of exchanges/DCMs in thelegislation. Indeed, we believe the plain language of the Dodd-Frank Act requires the

4 The term ’swap execution facility’ has been defined in the Dodd-Frank Act as a trading system or platform

in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made bymultiple participants in the facility or system, through any means of interstate commerce, including any tradingfacility, that- (A) facilitates the execution of swaps between persons; and (B) is not a designated contract market.The Dodd-Frank Act amends Section la of the Commodities Exchange Act with a new paragraph (50, and Section761(a)(6) of the Dodd-Frank Act amends Section 3(a) of the Securities Exchange Act of 1934 by adding a newparagraph (77) (def’ming a "security-based swap execution facility"). We refer to both as a SEF in this letter.

December 6, 2010Page $.

Commissions to recognize the distinction between SEF’s and DCM’s, and particularly in light ofthe current working market structure and manner in which OTC derivatives trade (see discussionabove), the Commissions should recognize trading models other than pure exchange.5Accordingly, it is critical that the Commissions do not impose requirements on SEFs thateffectively make them exchanges - without expressly calling them exchanges. For example, ifthe Commissions were to propose rules that in order for a SEF to satisfy its pre-tradetransparency requirement, all of its participants must be able to view (even if they cannotparticipate in) an ongoing RFQ negotiation, such disclosure might force the liquidity provider towiden its bid/offer spread so as to price in the risk associated with the information on that tradebeing broadcast to the entire market. It is not clear what the benefit of this would be to marketparticipants.

What should a SEF be?

Consistent with the goals of the Dodd-Frank Act, for institutional users, a SEF should(i) provide pre-trade price transparency (e.g., through streaming prices for standardizedtransactions and competitive real time quotes for larger or more customized transactions),(ii) incorporate a facility through which multiple participants can trade with each other (i.e., musthave competition among liquidity providers), (iii) have objective standards for participation thatmaintain the structure of liquidity providers (like swap dealers) providing liquidity to liquiditytakers (institutional buy-side clients), (iv) have the ability to adhere to the core principles that aredetermined to be applicable to SEFs, (v)provide access to a broad range of participants in theOTC derivatives market, allowing such participants to have access to trades with a broad rangeof dealers and a broad range of DCOs; (vi) allow for equal and fair access to all the DCOs andallow market participants the choice of DCO on a per trade basis, and (vii)have directconnectivity to all the SDRs. A SEF does not need to be an exchange to meet this standards.

Why is RFQ an acceptable model for SEFs?

The electronic RFQ model is an acceptable model for SEFs because it gives multipleparticipants the ability to execute or trade swaps with multiple participants by allowing liquiditytakers (clients) to access real-time electronic streaming of live, firm prices from multipleliquidity providers, or individually request real-time quotes from multiple liquidity providers.For example, for trades that are of a size or nature where streaming prices are not available orpracticable, RFQ offers a client the ability to request a quote that will only be transmitted to thethose liquidity providers selected by the client. This provides the buy-side client with access tomultiple eounterparty pricing, but limits the number of people in the market who know its trade -- thereby giving those liquidity providers in the RFQ sufficient time to redistribute the riskwithout other market participants interfering. Moreover, under the Dodd-Frank Act, the results

5 For an excellent statutory analysis and interpretation of the SEF definition, we refer to the Commissions to

(a) pages 4-6 of Morgan Stanley’s November 4, 2010 letter regarding the Definition of Swap Execution Facility,(b) International Swaps and Derivatives Association, Inc.’s (ISDA’s) October 1, 201010 letter on the def’mition ofSwap Execution Facility, and (c)the Asset Management Group (AMG) of the Securities Industry and FinancialMarkets Association (SIFMA) letter, dated November 24, 2010, each of which has been submitted during theCommissions’ pre-comment period for SEF rulemaking.

December 6, 2010Page 6.

of these transactions will be reported in real-time and publicly disseminated, thus enhancingtransparency in the market.

What are the key concerns regarding the Core Principles applicable to SEFs?

In order to register and operate as a SEF, the "trading system or platform" must complywith the enumerated Core Principles in the Dodd-Frank Act applicable to SEFs. Regulators havethe authority to determine the manner in which a SEF complies with the statutory core principles,and there is discretion for the Commissions to retain distinct regulatory characteristics for SEFsversus DCMs. It is critically important for the Commissions to apply the principles xvithflexibility given the market structure in which swaps are traded. Accordingly, regulators shouldinterpret core principles in a way in which SEF’s can actually comply with them. While many ofthe SEF Core Principles are broad, principle-based concepts -- which make sense given thepotential for different types of SEFs and trading models - some of the Core Principles arepotentially problematic for SEFs that do not operate a central limit order book or clearing. Forexample, the Position Limits or Accountability Core Principle continues to be a big issue in termsof a SEF’s ability to know and react to the parties’ positions (i.e., each SEF will need a fullmarket view to have the appropriate transparency to monitor this issue). This would requirecooperation among all the venues (SEFs, DCMs and DCOs), including position informationsharing agreements, so that if a position was exceeded, the SEF could block any execution. Inturn, in order to comply with and enforce the Emergency Authority Core Principle, SEFs willneed the ability to establish clear rules and guidelines about communication and coordinationwith the Commissions (i.e., when SEF can invoke emergency authority and the noticerequirements related thereto), and the ability for positions to be liquidated through the regulatedswaps market, which is typically not part of the platform’s role.

It is imperative that the Commissions do not interpret the SEF Core Principles to requirea SEF to act like an exchange - that is what the DCM core principles are designed to do.

December 6, 2010Page 7.

In sum, while we are supportive of the goals of the Dodd-Frank Act and believe increasedregulatory oversight is good for the derivatives market, we want to emphasize that flexibility intrading models for execution platforms are critically important to maintain so end-users canmanage their risks in a flexible manner. If you have any questions concerning our comments,please feel free to contact us. We welcome the opportunity to discuss these issues further withthe Commissions and their staff.

Sincere!y//�

L¢~’H. OleskyOhief Executive General Counsel